Bradynet
Posted by PILLZ (Sunday, May 09, 1999)
The Dollarization Debate
Last week was supposed to be heavy-construction time for the new international financial architecture. Treasury Secretary Robert Rubin made an important speech on Wednesday laying out Washington's views on the global economy. His deputy, Lawrence Summers, and Federal Reserve Chairman Alan Greenspan weighed in Thursday, testifying before Congress on the issue of dollarization among emerging-market countries. The dollarization hearing was the perfect opportunity to announce to our trade partners and regional neighbors that, yes, we do believe that economic growth and high employment are best fostered by sound money. And we welcome your interest in giving legal-tender status to the U.S. dollar within your own territory. It's a high compliment to us, and the beginning of your own sound-money commitment. But a unique opportunity was lost as Messrs. Rubin and Summers chose instead to emphasize the "costs" of giving up discretionary monetary policy. Instead of embracing those nations that no longer wish to manipulate their money for short-term political gain at the expense of long-term prosperity, U.S. leaders spurn them with warnings about losing their "monetary policy independence." Instead of applauding those governments that now see the folly of running down their currencies to gain a "competitive advantage" in export markets, the U.S. gives them ample reason to second-guess their own budding convictions. In short, Washington met their willingness to adopt the dollar with a response that conveyed a lackluster commitment to free trade and open markets. This is how the United States demonstrates global economic leadership?
No wonder Sen. Connie Mack (R., Fla.), who had called for the Senate Banking subcommittee hearing and who serves as chairman of the Joint Economic Committee, seemed frustrated by Mr. Summers's reticence to answer a simple question: Do you favor dollarization? Mr. Mack, a strong advocate for sound money who has long sought to make price stability the sole mission of the Fed, was clearly irked by Mr. Summers's noncommittal response.
At one point, Mr. Mack dared Mr. Summers to reconcile the Treasury's current position of measured ambivalence with Mr. Summers's own earlier views in support of dollarization for emerging-market countries. Mr. Summers dodged the challenge with a quip about being more concerned about taxpayers' money these days. Isn't this the same government official who urged Mexico to devalue the peso in 1994--a policy move that led to monetary debacle on our border and laid the groundwork for subsequent meltdowns spreading from Southeast Asia to Russia and back to Latin America?
The issue of dollarization goes to the heart of monetary stability in our hemisphere. With Mexico and Canada, our two most vital trade partners, considering the dollarization option at the highest levels of policy discussion and public debate, the U.S. is compelled to take a position. These countries are talking about effectively replacing their own currencies with the U.S. dollar or at least granting their citizens a choice of currencies. For the three signatory nations to the North American Free Trade Agreement, it would amount to the establishment of a common currency to more fully realize the economic returns from a tariff-free common market. No more surprise devaluations, no more deliberate currency depreciation to gain a price advantage on exports, no more protectionist responses to exchange rate-induced market distortions. So Washington needs to decide. Does it wish to encourage dollarization? Does it wish to discourage it? Or will it continue to thwart the entreaties of America's economic and political allies with a position of officious neutrality?
Mexico's situation in particular deserves American attention. The cost of capital is outrageously high. Small-business loans are hard to get, even at interest rates of nearly 30%, so entrepreneurial endeavors are suppressed despite the availability of motivated, talented workers. Why is it so expensive to borrow? Because the peso has not performed as a reliable monetary unit of account or meaningful store of value. Mexican citizens have seen their purchasing power undermined at home by inflation and diminished abroad through devaluation, not just once but multiple times since the Bretton Woods fixed exchange-rate system ended in the early 1970s.
Mexicans have come to expect monetary disaster every six years, coinciding with the national presidential election and triggered by the fiscal compromises that inevitably occur during the campaign period. Moreover, Mexico has proved vulnerable to unanticipated political shocks, from the assassination of reformer Luis Donaldo Colosio in March 1994 to the rebel uprisings in Chiapas--and has suffered inordinately from capital flight. Even now, as Mexico enters the campaign for the July 2000 presidential election, the underlying question is whether political stability--and with it economic, financial and monetary stability--can be maintained this time around.
The risk of devaluation unleashed by presidential politics is one reason Mexico is so interested in dollarization right now. But there is something else as well, something new. Mexicans sense that this next election could mark a turning point toward genuine democracy. Voters may finally have a true choice among candidates, and thus a real chance to support policies that hold out the potential for improving their own prospects for economic success. If dollarization becomes a key plank in a viable party platform dedicated to political stability and economic growth, Mexican voters will finally be in a position to demand the opportunity to turn their entrepreneurial dreams into reality.
But if businessmen see an opportunity, politicians see a threat. The populist answer to dollarization is predictable and despicable: defending the status quo and questioning the patriotism of those who would abandon the national currency; misleading people into viewing the choice of dollars over pesos as an act of political submission rather than economic liberation.
How can the U.S. be indifferent in the face of this struggle that has tremendous economic and political implications beyond Mexico? Some 34 nations encompassing 750 million people and a combined gross domestic product worth $9 trillion have signed on to work toward establishment of the Free Trade Area of the Americas by 2005. They need a positive signal if they are to depoliticize money, reduce the cost of capital and encourage fiscal discipline.
Now is not the time for Washington to play it safe. Dollarization has arisen as a spontaneous movement within our hemisphere. The ball is in America's court; if Washington plays it properly, it will score a powerful victory for free trade and free markets.
America's political leaders must not preach entrepreneurship without practicing sound money. The dollarization debate gives them the opportunity--indeed, imposes the responsibility--to demonstrate U.S. leadership and take the initiative in forging a new monetary order to serve the needs of a duty-free zone that could extend from Alaska to Cape Horn. America must communicate a vision of increased prosperity and freedom and invite the other nations in the hemisphere to help make it a reality.
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